Using Credit Cards to Build Credit

September 16, 2013, Written By Lynn Oldshue

We get this question a lot: What is the best way to use credit cards to build credit? Most people see credit cards as nothing more than money pits in the making, but they can be legitimate opportunities to build personal and business credit. The key is to understand how your credit card operates and then use the system to your advantage.

The guide below explains how to use a credit card to build credit without having to make a significant amount of costly purchases.

Step 1 – Understanding Your Card

Before you can start building credit with a credit card, you have to understand how credit card companies report payments to the credit bureaus. When you make positive payments on your account, the credit card company reports them to the three major credit reporting agencies: Experian, Equifax and TransUnion.

Every credit card provider is different in terms of when and how they report to the credit bureau. Thus, you will need to contact your company to learn what time of the month they make reports so you can make your payments before then. Note that it may take several days for your payment to show up on your account, so you need to plan for that in advance. As long as the money shows up before the report, you will begin to take some positive steps.

Step 2 – Start Using Your Card…Often

The only way to build credit is to use your card on a regular basis. If you don’t use your card, you will never get a positive mark on your credit–aside from a small boost for having one card for a long stretch of time. You can’t rely on that to get you in the 700s. Use your card to make your everyday purchases like your groceries and gas.

Don’t spend money that you don’t have. That is where you can get into trouble. Ideally, you need to already have the money on hand so that all you have to do is wait for the transaction to show up and immediately pay it off.

Step 3 – Pay Off Your Balance on Time

Keep the money you need for your credit card balance in your bank account. Then, when it comes time to make your monthly payment, just transfer the money from your account to your issuer. Note that this may take a few days to complete, so you will need to allot ample time for the payment to go through. One critical element in your credit score is your history of on-time payments. Make sure to pay off the balance well before the due date so you are not late. Then, you won’t have to pay any interest penalties either.

If you completely pay off the balance each month on time, your score will begin to increase and you will reap the benefits of using a credit card, such as generating cash rewards and having extra protections.

Step 4 – Increase Your Credit Limit

Once you start using your card like this on a regular basis, you should be eligible for a credit increase. This could happen after six months of consistent use, so don’t expect it to kick in right away. Your credit card company may automatically provide the increase for you, or they may require you to call in about it. If you get a higher limit, this will help your credit score–you have increased your available credit, so your debt utilization ratio will drop. This is another one of the major factors in your score.

Step 5 – Stick to the Plan

After you develop the right spending habits, stick with them. One of the biggest factors in your overall credit score is the longevity of the accounts you hold. The longer you can keep the same line of credit, the better off you will be.

What is the best way to use credit cards to build credit? Use them regularly and pay off the balance on time each month.



The information contained within this article was accurate as of September 16, 2013. For up-to-date
information on any of the terms, cards or offers mentioned above, visit the issuer's website.